If you have a client facing the prospect of company failure and therefore insolvency, then as a professional advisor, you can expect the directors to turn to you with a barrage of questions.
To help you put your client’s mind at rest, here are answers to four of the most common questions I receive from directors of businesses in distress.
1. What are the costs of insolvency proceedings?
Clearly every business comes in different shapes and sizes. The more complex a business (for example, a retailer with multiple sites and staff) the more expertise and resource are needed to conduct insolvency proceedings.
All insolvency practitioners act as Officers of the Court. Their objective is to save businesses and preserve jobs wherever they can do so. Furthermore they will maximise returns to creditors who are owed money.
When appointed, whatever the size of your client’s business, an insolvency practitioner’s first task is to conduct a thorough assessment. Then the practitioner must apply commercial judgement to make a decision about the best course of action to take.
In brief an insolvency practitioner’s options include:
- Working with directors to seek to execute a turnaround.
- Selling all or part of the business.
- If a business is deemed irrecoverable, closing the company down and realising the assets for the benefit of the creditors.
In general insolvency practitioners’ fees reflect:
- Case administration and planning.
- Realisations of assets.
- Trading, if appropriate.
- Dealing with creditors and their claims.
- Other case specific matters.
Fees are generally paid from asset realisations. On average they amount to circa 6% of the value of the assets. Furthermore the practitioners’ fees will ordinarily require approval from creditors prior to being drawn.
2. How long do insolvency proceedings take?
Timescales are largely dependent on the type of insolvency procedure and the complexity of your client’s business. On average they are likely to take at least three to six months to complete.
The principal insolvency processes likely to involve your client are either Administration or Liquidation.
Creditors Voluntary Liquidations are usually initiated by directors.
Compulsory Liquidations are court driven procedures, usually initiated by creditors.
Following appointment, your client’s insolvency practitioner will seek to:
- Realise assets.
- Distribute funds to creditors.
They will also submit a report on the directors to the Insolvency Service.
Alternatively, if the business is viable your client may wish to consider a Company Voluntary Arrangement. This generally involves reaching agreement with creditors to repay liabilities over a period of three to five years.
3. What will the impact of insolvency mean to the business and its directors?
A company is considered to be insolvent by law if it is unable to pay its debts. There are two tests for corporate insolvency:
The cash-flow test: determines whether the company is currently, or will in the future, be unable to pay its debts as and when they fall due for payment.
The balance sheet test: determines whether the value of the company’s assets is less than the amount of its liabilities, taking into account as-yet uncertain and future liabilities.
If your client’s company is deemed to be insolvent then:
- Directors may face an increased risk of personal claims arising from actions, such as wrongful trading, taken whilst their company was insolvent.
- Directors may also risk disqualification as a result of actions taken whilst a director of an insolvent company.
- Lenders may take steps to enforce any security they hold. For example they may call in personal guarantees given to secure loans/finance facilities.
- Sole traders and partnerships (non LLPs) are liable for debts due to suppliers, HMRC and anyone else owed money by the business. Consequently personal assets may be at risk of being sold to repay the debts.
4. How will your client’s landlord react if it suspects insolvency?
Prior to insolvency processes commencing, landlords have a number of options open to them. They can:
- Follow up on rent demands. It’s easier to collect rent before an insolvency process commences.
- Use rental deposits against rent arrears.
- Seek forfeiture of the lease.
- Seek to exercise distress over a tenant’s assets, thereby giving the landlord the right to enter the property and remove and sell goods belonging to the tenant.
- Agree with the tenant a ‘surrender’.
- Sue the tenant for the debt owing.
- Demand payment from guarantors.
- Demand payment from sub-tenants.
Once a tenant becomes insolvent, a landlord’s rights to pursue it are restricted. The type of insolvency procedure entered into by your client, i.e. administration, liquidation and so on, will govern the landlord’s actions.
Every insolvency practitioner will advise you that seeking proper advice from a professional specialising in insolvency, at as early a stage as possible will minimise a director’s personal exposure. This means the earlier you can get your client to talk to us, the more options your client will have and the more we can do to help. I trust you have found this post helpful. Do get in touch if you have any questions.